Entering 2024, the size of US Treasury bonds has reached 34 trillion dollars. This year, the US needs to issue more treasury bonds to repay old bonds and pay interest. Now the interest rate of the Federal Reserve is as high as 5.25% to 5.5%, causing the coupon interest rate for new US bonds to be much higher than the coupon interest rate for old bonds.
Then, investors will buy new bonds and sell old bonds. Demand for old bonds falls, causing their prices to drop.
We know that bond prices are inversely proportional to bond market yields, that is, bond prices fall and bond market yields rise.As a result, US bond market yields have continued to rise since entering 2024.
However, US bond ETFs hold a large number of old bonds. As bond prices fall, ETFs also fall along with it. This explains why US bond ETFs have continued to decline for more than 20 years since this year.
However, with declining US inflation and huge interest pressure in a high interest rate environment, the Federal Reserve will definitely cut interest rates this year. Currently, the focus of the market is mainly on whether to cut interest rates in the first quarter or the second quarter.
But no matter what, as long as the Federal Reserve's interest rate falls in the future, the coupon interest rate for newly issued bonds will be less than the coupon interest rate for old issued bonds, and less interest will be generated. Then investors will choose to buy old bonds, leading to increased demand for old bonds, rising prices, and declining market yields, but ETFs holding a large number of old bonds will rise at this time.
Reviewing the Federal Reserve's previous interest rate cuts, we can find that interest rate cuts can be divided into three situations:
1. Preventive interest rate cuts: The Federal Reserve began cutting interest rates earlier, and the US achieved a soft landing (profit downturn...